Cannabis Business Insurance and Tax Failure: How to Survive in 2018

February 28, 2018

Derek Peterson, a successful entrepreneur and family man from California, received a letter from his life insurance company saying that his policy application was rejected. “We are regulated by agencies of the…” said the incomplete wording.

Peterson was upset but not really surprised. As a CEO of Terra Tech Corp., a cannabis-focused agriculture company, he is always on alert concerning difficulties with paying taxes and establishing banking relations. But the denial of a personal insurance policy was not a common complaint among marijuana entrepreneurs and employees in the state.

“We have discontinued the processing of your application for insurance due to company policy. We cannot accept premiums from individuals or entities who are associated with the marijuana industry”, the letter stated.

Risky Lifestyle or Fear of Federal Intervention?

Experts claim that insurers may view any association with marijuana as a type of ‘risky lifestyle’, one of the most common reasons for being denied insurance. However, Peterson says he admitted to using pot in an application and suspects insurers did some research on his business interests that ultimately led to the decision.

In the state of California, weed has been legal for medical and recreational purposes since voters passed Proposition 64 on November 8th, 2016. Peterson’s story occurred later the same year. The problem is that the federal government still classifies marijuana as a dangerous substance. This leads to a legal gap between state and federal authorities, including banks and insurance companies. In all government-related spheres, it is much easier to say ‘No’ than to try to predict if it would cause negative effects. And the wording from Peterson’s letter saying “We are regulated by agencies of the…” suggests some fear of government regulators.

Slow Change Towards a Brighter Future

Recent events have shown that this year Derek Peterson and those of like minds won’t be satisfied as well. Due to the new California pot holiday, January 1st, 2018, the day when the state began commercial sales of cannabis, everyone was interested in whether the state’s policy would reconsider the regulation of marijuana and the attitude towards pot users.

But on January 4th, a few days after marijuana legalization, Jeff Sessions, the current Attorney General of the United States and a member of the Republican Party, decided to rescind relatively liberal guidelines for the federal regulation of state marijuana laws.

This act affected the freezing of banking activities belonging to entrepreneurs and employees in the cannabis industry and led to the uncontrolled flow of marijuana cash. Moreover, these businesses still have to pay higher taxes due to the IRS classification as a ‘law-abiding illegal-drug trafficker filing business taxes’. Many federally legal businesses receive benefits from tax credits and are able to deduct the costs of employee expenses, equipment, travel and so on from profits on their IRS filings. However, marijuana businesses aren’t eligible for any credits on their federal returns.

Are there any Possible Solutions?

According to federal law, all business transactions have to be recorded. To that end, everybody in the cannabis industry is searching for a solution to its financial constraints. For example, some entrepreneurs are turning to blockchain and cryptocurrencies. Blockchain creates a clear trail of virtual money that helps to reduce cash flow on the street. Recent years have also given rise to cannabis-specific cryptocurrencies like PotCoin and HempCoin.

One of the interesting solutions is a Cannabis Seed-To-Sale Software. This is a platform for enterprise resource planning of the cannabis industry. Having an entire business managed in one place helps to control money and protect entrepreneurs from sudden issues arising anywhere from the moment of planning to sales regulation.

Small and mid-sized cannabis businesses are looking for ways to obtain legal access to banking. “These are legitimate, tax-paying businesses that want and deserve to be heard,” said Mason Tvert, a cannabis activist. Julie Hill, a financial industry expert at the University of Alabama’s School of Law, says she believes the company that rejected Derek Peterson’s claim may have concern about the violation of laws against money laundering in his business. The case demonstrates an absurd contradiction: Despite the fact that in his state his business is legitimate, Peterson is unable to run it at the legal (federal) level of other businesses.

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